Question

If in a market for a good where the consumers’ elasticity of demand is relatively inelastic there is an increase in shoplifting at the stores that sell this product, which is likely to be affected more, the product’s price (the price effect) or the quantity of the product purchased (the output effect)? Which of these products is likely to have a more inelastic demand, salt or Cheerios?

Answer 1

Shoplifting, the theft of retail products by customers, is the second leading cause of inventory loss for retailers behind employee theft. Shoplifting by customers has a number of direct and indirect effects on a business. For businesses, the need to raise prices because of regular shoplifting issues is becoming more common.

When we are dealing with an inelastic product, shoplifting increases the price of a product. The price effect would be more. There will not be that muxh fall in the demand for the product. This is beacuse we are dealing with having inelastic demand.  If the price for an inelastic good is increased and the demand does not change, the total revenue increases due to the higher price and static quantity demanded. However, price increases typically do lead to a small decrease in quantity demanded.

Cheerios is a particular cereal brand. So it will have more substitutes. As we narrow down a product to a brand, it will be habing more substitutes. Cheerios will be having a more elastic demand.

In this question, salt is having more inelastic demand. This is because salt is a necessary item. We also spend a very small proportion of our income on the purchase of salt.